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Best way an adviser can help: Cut up the credit cards

Plan advisers who want to step up their service to 401(k) clients and their workers need look no further than bread-and-butter debt management.

When it comes to retirement plan services, financial advisers have placed a lot of emphasis on the nitty-gritty of plan design, including investment menu selection, raising workers' contribution rates and increasing employees' participation in plans. Advisers who specialize in retirement plans also are burnishing their credentials and touting their ability to provide fiduciary services to clients at a time when employers put a premium on risk management.

But experts warn that advisers shouldn't let the basics of debt management slip by employees. Consumer debt in the form of credit card balances and mortgages take a significant bite out of workers' ability to save, and getting employees to concentrate on saving for retirement is an uphill battle if massive debts are competing for those dollars.

"There needs to be a holistic approach to the whole picture. You can put 10% of your salary into your 401(k), but if you're adding to your debt at a 12% rate, then you're getting nowhere," said Philip A. White, former director of Racker Rewards, the employee benefits program at Rackspace Inc., an information technology hosting firm.

He is managing principal at Ducere Capital and is taking his benefits expertise to a new level by starting a planning firm that will provide holistic planning to employees.

These days, the size of workers' debts is growing faster than their retirement savings.

Active participants in defined-contribution plans in 2010 held about $9.2 trillion in those savings plans, according to an analysis by HelloWallet.

They also owed about $4.2 trillion in debt.

Further, from 2010 to 2011, 64% of participants in defined-contribution plans accumulated debt at a faster rate than they were accumulating retirement savings. That is up from 46% of retirement plan participants who lost ground between 2006 and 2007.

Feeding the debt beast takes a toll on workers' other financial goals.

For instance, from 2010 to 2011, 89% of workers in DC plans who were accumulating debt faster than savings also had insufficient emergency savings, according to HelloWallet's analysis.

That is up from 84% from 2006 to 2007.

Although advisers have demonstrated plenty of interest in helping 401(k) clients with other areas of plan management and improving outcomes for participants, they tend to be less attracted to the plain-vanilla planning behind getting workers to tighten the reins on their debts.

"There is quite a bit of regulatory pressure for advisers to focus on investment allocation and fund lineup issues," said Matt Fellowes, chief executive of HelloWallet.

"It's an unfortunate consequence of 40 years of public policy that's geared toward preventing bad behavior rather than encouraging good behavior," he said. "This is a plan sponsor environment that's more focused on de-risking the plan rather than emphasizing the efficacy of the plan."

Employers' biggest objection to helping workers handle their debt problems and work in holistic planning is fear of being too paternalistic.

"Even up until recently, employers resisted things like auto-enrollment into the 401(k). They feel it's a decision left to the individual, and they don't want to get involved with the worker's budget or paycheck," said Jim Phillips, the president of and an adviser at Retirement Resources.

He added that while he recognizes that debt management via the workplace is a good idea, especially considering that workers who are financially stressed may be distracted at work, few employers are asking for that service.

Largely, it has been forward-thinking plan sponsors who are leading the charge behind emphasizing financial wellness at the workplace in order to improve retirement savings outcomes. Those plan sponsors are leaning on advisers and service providers to work debt management guidance into their benefits programs.

During Mr. White's tenure at Rackspace, he established a program to address workers' more comprehensive financial needs. Retirement plan service providers and local banks weren't very helpful, as workers needed a holistic service that was also product agnostic.

Hiring a financial planner would be great, but there needs to be a way to scale the service so all workers have access.

As part of a comprehensive financial wellness program for Rackspace, Mr. White wrangled a group of local fee-only advisers and was able to get them to agree to host periodic meetings at the firm.

These planners, who worked out an hourly rate with the employer, also agreed not to discuss any investments or sell products, according to Mr. White.

The advisers would hold short meetings with workers, during which they would cover the basics of an employee's financial background: How much debt are you carrying? What is your household income? What is your next big goal?

None of these topics are technically investment advice, but they are areas that can make a major difference in how clients save for retirement.

"They need to know the next couple of things to get themselves into better shape than they were yesterday," he said. "For many, it's a matter of 'How do I get out of debt?'"

The employer, meanwhile, is in the prime position to act as a conduit for this guidance.

Workers already get most of their financial products through the workplace, such as disability, health and life insurance coverage, Mr. White said.

In the end, the improvement goes beyond just enabling the worker to save more money via holistic planning. There is a win for the employer, too, in the form of improved recruitment and retention.

"Someone who takes an interest in financial wellness is probably a good employee. They're not worried about managing debt or putting food on the table," Mr. White said.

"They are more productive," he said.

"When was the last time you saw a worker blog about the great benefits that their company offers?" Mr. White asked. "We've seen occasions where people go to sessions with their planner and say it's a great experience and that their company values them as an individual and an employee."